Just this week, another big financial company — CIT Small Business Lending Corporation — filed bankruptcy. CIT filed a “prepackaged” filing, in which terms for restructuring are negotiated before the bankruptcy case is filed. In more conventional bankruptcy filings, it can take a year or more before a plan is confirmed; in a pre-pak, filers may have a plan confirmed in a month or two.

Having a confirmed plan, of course, achieves the desired reorganization, and allows the company to continue in business under a new business plan or model, with workable debt load and other stable financial underpinnings. The faith of investors and vendors must be strong for the enterprise to exit and prosper. During the negotiations prior to the filing, the terms can be worked out in a mutually-acceptable manner, rather than with the heavy leverage that courts often apply when they control whether a firm exits intact or is dissolved.

On Tuesday CIT was granted Bankruptcy Court approval to immediately tap $125 million of a debtor-in-possession loan through Bank of America Corp. when Judge Allan Gropper of the U.S. Bankruptcy Court for the Southern District of New York signed off on numerous routine “First-Day” motions. Included was permission to continue making intercompany loans and pay essential employees and vendors. There is a December 8 hearing date to consider approval of CIT’s reorganization plan, which reportedly already has secured the preliminary approval of 90 percent of eligible debt-holders who signed off on the prepackaged chapter 11 plan.

We sincerely hope that CIT can exit and get back to the essential role of lending to small business quickly. In this economy where glimpses of recovery compete with reports of continued losses in employment and consumer purchasing, a stable and friendly source of capital may be the only sure salvation of many of our best small companies and entrepreneurs.

What else can be done to help small business survive and thrive in the tough times we’re in?

(Hat tip to Stefan Calos for contributions to this article.)

We have been discussing preferential payments, defenses and avoidance tactics.  But what businesses care about most is getting paid for goods and services provided. This entry will discuss how to collect from a customer who has declared bankruptcy.   

After I send back the preferential payment, how do I get paid for the original goods/services?

To obtain any kind of recovery on a debt from a debtor who has filed for bankruptcy protection, you must file a document called a “Proof of Claim,”  which summarizes the amount of debt and its priority.  Often, your debt will be listed in the bankruptcy filing, and you will be sent a Proof of Claim by the Bankruptcy Court.  You don’t necessarily need a lawyer to fill out the Proof of Claim form, but you probably should consult an attorney if you receive a preference demand letter.   Attach to the Proof of Claim a copy of the invoice or contract that forms the basis of your claim, or a summary of the elements that make up the claim.  The Proof of Claim is then filed with the Court, or sent to a claims agent if the case is a big, publicly traded company like Circuit City or LandAmerica. 

After I file my Proof of Claim, when will I get paid, and how much will I get paid?

When you get paid, and how much you get paid, depends on several factors, including which chapter the debtor has filed (7, 11 or 13), and how much there is available to pay creditors.  In a chapter 7, for example, a trustee sells all of the assets of the bankrupt company, and then distributes what is left after costs of liquidation to the creditors.  If there are a lot of things to be sold by the trustee, it will take a long time before funds are distributed to creditors.  In a chapter 13, distributions to creditors generally happen more quickly.  In large, Chapter 11 cases, the Chapter 11 Plan must first be confirmed – a process that can take many months.